expert
Expert with best answer

Luca

100% Recommendation Rate

22 Meetings

826 Q&A Upvotes

USD 179 / Coaching

3

Breakeven Point - Clarification Question

Hello!

I still don't get the difference between the two formulas for breakeven:

(1) Revenues - Costs = 0

(2) Fixed Costs / Contribution Margin

What is the difference here and what does contribution margin inherently tell us? And what are the effects of different cost structure (e.g. one company has higher fixed costs whereas the other company has higher variable costs/unit if number of units is exactly the same)? Thanks a lot!

Hello!

I still don't get the difference between the two formulas for breakeven:

(1) Revenues - Costs = 0

(2) Fixed Costs / Contribution Margin

What is the difference here and what does contribution margin inherently tell us? And what are the effects of different cost structure (e.g. one company has higher fixed costs whereas the other company has higher variable costs/unit if number of units is exactly the same)? Thanks a lot!

3 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Luca

100% Recommendation Rate

22 Meetings

826 Q&A Upvotes

USD 179 / Coaching

Hello,

The second formula is not something that you can use to calculate breakeven period. In order to calculate the breakeven period you should use the DCF method.

Best,
Luca

Hello,

The second formula is not something that you can use to calculate breakeven period. In order to calculate the breakeven period you should use the DCF method.

Best,
Luca

Book a coaching with Antonello

98% Recommendation Rate

101 Meetings

1,059 Q&A Upvotes

USD 189 / Coaching

Book a coaching with Francesco

100% Recommendation Rate

2,777 Meetings

3,497 Q&A Upvotes

USD 349 / Coaching

Hi Anonymous,

the second formula is equivalent to the first, referring to the amount of volume to reach breakeven. You can derive it as follows:

Revenues-Costs=0

p*V-c*V-FC=0

V=FC/(p-c)

As a consequence you see that:

  • If FC grows, the volume for breakeven grows
  • If (p-c) grows, the volume for breakeven decreases

Hope this helps,
Francesco

Hi Anonymous,

the second formula is equivalent to the first, referring to the amount of volume to reach breakeven. You can derive it as follows:

Revenues-Costs=0

p*V-c*V-FC=0

V=FC/(p-c)

As a consequence you see that:

  • If FC grows, the volume for breakeven grows
  • If (p-c) grows, the volume for breakeven decreases

Hope this helps,
Francesco